Yesterday (April 6, 2009) Trading Markets posted a story “Talks Between Apple and China Unicom Suspended.” The report stated that; “Talks between China Unicom and Apple to introduce iPhone into China came to a halt as Apple was said to have asked the Chinese telecoms carrier (China Unicom) to stand costs of building Apple special stores in this country after China Unicom agreed on a profit-sharing plan proposed by Apple.”

My reaction yesterday – Wrong! And exceptionally poor background research on the part of Trading Markets!

iPhonAsia believes that Apple and China Unicom are moving rapidly to conclusion of a formal agreement to launch official iPhone models (plural) in China. So what’s with the Trading Markets story? There may well have been conversations over China Unicom sharing some expenses associated with developing Apple’s soon to be unveiled China App Store (NOT Apple brick and mortar stores as the Trading Markets report implies). iPhonAsia believes this matter is now settled. It is possible that China Unicom will indeed share some of the China App Store expenses as they may in turn receive a generous share of Apple’s slice of China App Store revenues … slightly more than ½ of the 30% share that Apple receives on app sales.

Beijing. April 7.INTERFAX-CHINA – Apple Inc. has agreed to grant China Unicom the majority share of revenues from its (China) App Store as part of ongoing discussions between the two parties regarding the introduction of the iPhone to China, a China Unicom source told Interfax on April 7.

Yes I did see it (Trading Markets article) … That is either totally bogus or a Mandarin-to-English translation goof-up. I sent two e-mails this morning to Trading Markets in an effort to set them straight. No reply, no edits made, and no surprise to me. Doing a bit more detective work … I went to Trading Market’s referenced source – ccidnet.com and translated the site to see if I could find the original article with references to “talks suspended.” Nothing close to that story anywhere on ccident.com … at least that I could find.

The best “iPhone deal” reporting I’ve seen coming from China has been from Interfax China and JLM Pacific Epoch. Both sites seem to have connections inside China’s telecom industry feeding them insider tidbits. Many Chinese media and tech sites pick up the scoop from Interfax and/or JLM Pacific Epoch and then rerun or re-edit their story.

Here is my take on this Trading Markets piece. I think a news service (possibly ccident.com) in China picked up on a sentence (“According to the source, the sticking point is the division of revenues from the online iPhone applications store”) in an article on Interfax TMT China’s weekly bulletin (subscriber only) and simply miss-read it. Any possible dispute would have NOTHING to do with Apple Stores in China (Sanlitun and soon in Qianmen). It could, however, have something to do with Apple’s China App Store.

What’s really going on here? China Unicom is purposefully leaking to the media that “all is not yet settled” and there remain some “discussion points,” including an issue over the amount of Apple’s China Application Store revenue sharing. Apple kicks 70% to developers and keeps 30% for App Store maintenance and other marketing and distribution expenses. I suspect China Unicom will be promoting many “for China” apps (within Apple’s soon to be unveiled China App Store) as part of their iPhone deal with Apple and they want more than a minority slice (more than ½ of Apple’s 30%) for select apps that China Uincom will be promoting. I’d bet this App Store revenue sharing issue has already been settled. I fully expect that senior Apple executives will be in Beijing very soon! Purpose will be to tie up any loose ends and –

Meet with China Unicom

Pay a courtesy call to China Mobile

Meet with MIIT*

Sign the deal

Much of the recent spin in the press (e.g. “deal not done” … “there are issues to resolve”) stems from China Unicom’s failure to control and contain their Shanghai subsidiary. As you no doubt heard and saw, the Shanghai Unicom subsidiary, without authorization, used images of iPhone 3G to promote their forthcoming WCDMA 3G services. This caused a major stir that reached all the way to Cupertino. China Unicom execs in Beijing had to do some fast footwork and backtracking so that they could preserve the “surprise element” (deal announcement). China Unicom also lost some face as a result of this incident. The loss of face was with
Apple and within China’s telecom industry. Many of China’s telecom pundits advised that China Unicom must immediately retract any suggestion that a deal was done. They further suggested that the only way for China Unicom to regain any leverage with Apple would be to put out stories suggesting that “issues remained to be negotiated.” Even if a deal was 100% done (and it’s technically not done until MIIT approval*), China Unicom would lose face if they did not put out some spin in the press. And that’s exactly what they did. But IMO the Trading Markets story goes way too far with the spin (intentionally miss-leading? Or a very poor translation?) and is total B.S.

Best bet for an announcement is May 17. Next best bet is WWDC in June. The May 17 date corresponds with World Telecom Day and China Unicom’s target date for trial launch of its WCDMA 3G network in 55 cities. I’m beginning to question whether May 17 will be the “announcement” day, as any such news would beg questions
over new model iPhones. It appears likely that new models won’t be unveiled until WWDC – June 8th – 12th. There won’t be any official iPhone in China launch before July 1. Could be August or Sept.

*NOTE: Ministry of Industry and Information Technology (MIIT) approval of iPhone and WVAS (e.g. App Store, iTunes) is mission critical to a formal iPhone launch. Regardless of whether Apple and China Unicom are in 100% agreement and have inked a deal, MIIT must approve.

Update – March 8, 2009:Interfax’s Cindy Geng is reportingthat a China Unicom delegation is visiting Apple and will conduct “decisive negotiations” on March 8 (that would be now). Cindy Geng’s report is based on an internal telecom source. The source is “confident that the talks will be successful.”

iPhonAsia has picked up from several sources in China that a March ’09 Apple/China Unicom summit would take place, however, this is the first report of a specific date. The CNFOL.com article below spells out more details on possible negotiation points (many may have already been resolved).

One other notable item from the Interfax report – “China Unicom is now preparing to obtain the network access license for the iPhone from the Ministry of Industry and Information Technology (MIIT). The MIIT refuses to test Wi-Fi capable handsets, consequently China Unicom has prepared versions of the iPhone both with and without Wi-Fi.”

Meanwhile … China Mobile continues in “cooperation talks” with Apple over releasing the iPhone. China Mobile CEO Wang Jianzhou, March 5, 2008:“We hope the iPhone can be used in China Mobile’s network, and Apple has demonstrated its will.”

China Unicom to Meet with Apple over iPhone

Here are a few key takeaways from an extensive iPhone in China article posted today in a China tech blog Computer Reporter by Tao Yuanli.

NOTE: The excerpts below have been translated from Mandarin by iPhonAsia. Apologies for less than perfect translation. The full article is available HERE in Mandarin.

Lou Qinjian, Vice Minister MII

Ministry Information Industry Ministry (MII) Vice-minister Lou Qinjianconfirmed that China Unicom is “engaged in clandestine iPhone in China negotiations with Apple.” Lou Qinjian would not disclose any details regarding the negotiations, however he did reveal that:

In early February 2009, China Unicom began W-CDMA 3G network and the iPhone compatibility tests in the Hebei Province. The tests used the HSDPA network, and the downloading speed surpassed 150KBs. The Hebei Province migration network company involved in testing has given the tests a “satisfaction” evaluation. Thus it can be seen, that iPhone carries on the 3G network’s test smoothly.

China Unicom Chairman Chang Xiaobing

On September 16, 2008, China Unicom Chairman Chang Xiaobing indicated at the general meeting of shareholders that China Unicom will “pay attention to the commercial turning point which highly iPhone possibly brings, and hopes to begin a depth of cooperation with Apple”

It is also reported that Chang Xiaobing will go in person to Apple Headquarters in Cupertino to discuss cooperation matters. There are four (4) issues to resolve:

The issue of a subsidy payment from China Unicom to Apple for each “on contract” iPhone.

Whether Apple will agree to disable WiFi on iPhone in China. WiFi on mobile handsets does not conform to China’s WAPI standard of security

Whether Apple will agree to pre-load iPhone with applications popular in China (e.g. Youku vs Youtube).

iPhonAsia comment: There have been several reports of a planned March 2009 (that would be now) visit to Cupertino by key China Unicom executives. Here’s who iPhonAsia expects might be on the guest list:

Investment bank Piper Jaffray is out with a bullish research note on Apple today predicting a diversification of the iPhone line into a multi-tiered family of handsets that will combine for sales of 45 million units next year.

The 4-page report, authored by analyst Gene Munster, attempts to outline the future direction of the iPhone family for Apple shareholders, offering guidance on how to best think about unit growth, changes in revenue share, and strategic shifts that may play out as the company enters new international markets like China where local dynamics may complicate its model of working with only one exclusive carrier.

“While most investors view our estimate of 45 million iPhones in 2009 as outrageously aggressive, we are maintaining our estimate based on several factors,” Munster wrote. “First, we expect Apple to introduce a 3G iPhone model with additional features in the next 3-6 months. We also expect Apple to offer an entire family of iPhones by January 2009 at the latest including lower priced models that decrease the average selling price (ASP).”

More specifically, the analyst expects a 3G model to arrive in June followed by a “perhaps more significant” introduction of a model by next year that will be priced between $200 and $300, addressing a more price sensitive market. As such, he expects iPhone ASPs to drop from $489 in 2007 to $365 in 2008 to $314 in 2009.

This pattern would mirror the path taken by Apple as it matured the iPod family, he said, where a slow by steady diversification saw the company enter lower price points with every new revision of the player. However, he noted that the iPhone’s unit growth curve stands to be significantly steeper than the iPods, given that Apple sold more iPhones in the first two days of sales than it did in the first three quarters of iPod sales.

“And the company did not sell over 2 million iPods in a quarter until the iPod’s third year of sales, whereas the company sold over 2m iPhones in the second full quarter of sales,” Munster added. “In sum, we believe the iPhone is a full 2-3 years ahead of the iPod in terms of its historical growth pattern.”

Compared to iPod units, which grew a radical 409 percent between Apple’s fiscal 2004 and 2005, the analyst is modeling iPhone units to grow slightly slower at 304 percent between fiscal 2008 and 2009, given some uncertainty as to how quickly the company roll out cheaper models.

Munster’s estimates also take into account the continued international rollout of the handset, which he believes will double the addressable market for the device every year for the next two years. With 3.7 million units having been sold through December via 6 carriers (who combined for a subscriber base of 153 million), he estimates the iPhone’s penetration into this addressable market to be just 3 percent.

One key component of the international iPhone rollout is of course China, where market dynamics complicate Apple’s business model of exclusivity, leading the analyst to believe the company will likely need to alter its terms in order to launch the device in conjunction with a carrier like China Mobile that sports over 370 million subscribers.

“We have spoken with people close to China Mobile and our conversations lead us to believe that Chinese carriers are unlikely to sign a revenue sharing agreement with Apple,” he wrote. “This is due in part because of the 70 percent market share enjoyed by China Mobile. The bottom line is that the mobile phone market is less competitive in China than it is in the US and Europe.”

As a result, China Mobile appears unwilling to pay the monthly revenue sharing of approximately $15 per month which Munster estimates other exclusive iPhone carriers are currently paying Apple. In time, that may force the company to alter its strategy of signing exclusive revenue sharing agreements with its partners in Asia, which he believes will enable it to sell the iPhone in China by the middle of next year.

In support of this theory, the analyst pointed to recent comments from chief operating officer Tim Cook, who revealed at an investor conference last month that Apple is “not married to any business model” and is instead “married to … shipping the best phones in the world.”

In the event that Apple does forgo its present revenue share model and exclusive carrier relationships, it would likely seek a one-time subsidy from each carrier per iPhone sold.

“We believe the early hype surrounding the launch of the iPhone enabled Apple to garner steep revenue sharing agreements for the ‘must have’ device from the initial carriers like AT&T, O2, and T-Mobile,” Munster said. “However, as the iPhone becomes an established player in the mobile phone market and competitive offerings become available, Apple may not be able to command the exclusive agreements with high revenue sharing plans as it did initially.”

The Piper Jaffray analyst maintains a Buy rating and $250 price target on shares of the Cupertino-based Apple.

Wang Xudong, the Minister of the Information Industry of China, has confirmed that the restructuring of the country’s telecom industry is in progress. This is the first time a Chinese top official made such an announcement, sources reported.

However, Wang declined to give the details of the restructuring scheme and the specific time to issue the 3G licenses. In February, the Shanghai Securities News reported that China has worked out the preliminary restructuring scheme for its telecom industry, which will allow three Chinese telecom operators, namely China Telecom, China Netcom and China Mobile to run the full-range telecom services.

It is also revealed that China Unicom’s CDMA network will be merged to China Telecom, and its GSM network to be merged to China Netcom.

Among other mainland telecom firms, China Telecom was up 0.16 hkd or 2.88 pct at 5.72 and China Netcom was up 1.3 hkd or 5.74 pct at 23.95 while China Mobile (nyse: CHL – news – people ) was down 0.3 hkd or 0.26 pct at 113.5.

‘We… confirm that there are no negotiations or agreements relating to intended acquisitions or realisations,’ China Unicom said in a filing to the stock exchange.

Analysts attributed the sector’s gains today to expectations that the long-awaited industry restructuring on the mainland could take place soon.

Goldman Sachs (nyse: GS – news – people ) said in a note that it believes a restructuring plan could be announced in the second quarter.

Personnel changes in telecom companies could come even sooner, it said.

The China Securities Journal quoted Chang as saying that the restructuring plan is now being reviewed by the state council, or China’s cabinet.

‘The restructure will be launched within this year,’ Chang was quoted as saying.

Media reports have said previously China Telecom will buy China Unicom’s CDMA business while China Unicom’s GSM business will merge with China Netcom.

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iPhone in Asia Editorial Comment:Analysts have speculated that following the reshuffle of China’s telecom industry, which is expected to happen in the near future, China Telecom will be responsible for W-CDMA network construction after it receives a 3G license to operate in the mobile industry.

One of the questions asked during today’s Apple Shareholder’s Meeting was about the status of iPhone launch in Asia and Apple’s negotiations with China Mobile.And how important China might be to Apple’s 10 million iPhones in 2008 goal.

Tim Cook added that iPhone would be in Asia in 2008, and would, at some point, be in India and China. Yet Tim Cook also emphasized that Apple was not announcing any specific launch plans today.

Steve Jobs then tapped Tim Cook on the shoulder and with a grin said “I think we are in China now.” Jobs may have been reminding Tim that Apple is already selling iPods and Macs in China … but most in the audience took it to mean the 400,000 unlocked iPhones already in China and they laughed.

Tim Cook said that the unlocked iPhones in China today show how much demand there is in China and India, and that the company wants to sell there, and will sell there.

Steve Jobs then addressed the China Mobile negotiations rumors.He reiterated that much ado (about nothing) has been made in the press about talks with China Mobile … and that “you should not believe everything you are reading.” Steve Jobs also repeated his comment (made during his Jan 15 interview with Jim Goldman) that “there has been only one (1) meeting with a single China Mobile representative.”

Rather than focus on China, Steve Jobs and Tim Cook were careful to state that iPhone would be “coming to Asia” this year. They were also clearly downplaying any notion of “hot and heavy” negotiations with China Mobile.

Tim Cook stated that “we are in talks with many carriers” and that iPhone would “be in China” but seemed to imply that this may not be the first nation in Asia to launch iPhone.

Based on my own research, I believe we will first hear about the Pacific Rim group of nations under the Singapore Telecommunications consortium. For more analysis and likely nations to be launched first see – link>

BEIJING (Reuters) – China Mobile, the world’s largest mobile phone operator, said on Monday it had not officially entered into talks with Apple Inc to bring iPhones to the mainland, but was interested in doing so.

[key words above are “not officially” … China Mobile will only use the word “formal” or “official” when a deal with Apple is done.]

In January, China Mobile said talks with Apple on launching the U.S. company’s popular iPhones had been called off, although Apple has never commented officially on the issue.

[In January there were never any substantial or ongoing talks.Accoring to Steve Jobs, there was just one informal meeting with a China Mobile executive in Cupertino … The “talks off” ploy was suspiciously timed for day-one of MacWorld 2008 when the world tech/business media wouldbe focusing on Apple.See – Press gets Spun by China Mobile]

[There’s that word “officially” again]…. [“iPhone Problem?”Problem how?Problem as in so-called black-market problem for Apple?Or problem as in we’d better sign Apple before the China telecommunications industry restructuring is announced?]

“As long as our customers want this kind of product, we will keep all options open,” said Wang.

[“As long as our customers want this product” …Translation = If we don’t sign Apple, we stand to lose some of our most valued customers when China Unicom acquires China Netcom and is then granted a W-CDMA 3G license]

Investors had cheered Apple possibly winning access to China Mobile’s 350 million subscribers — more than the population of the United States — when news of talks helped Apple’s stock climb more than 10 percent on November 13.

[Pacific Rim carriers deals will most likely be announced in late Spring or early Summer. ]

The iPhone, a hot-selling cell phone that allows Internet access and plays music, sells for about $500 in the United States — roughly double the average monthly salary in China.

[The iPhone is “too expensive” argument ignores tangible evidence to the contrary. While the average salary is quite low compared to Western standards (see – China Mobile and Apple – The 2008 iPhone Games), there is a fast rising middle-class in China and they do not want a knock-off iClone or lesser “iPhone killer.” InStat estimates that 20% of handsets sold in China in 2007 cost more than 4,000 RMB (US$533). In another words, there are an estimated 28 million (and growing) potential users for the iPhone in China… and growing.

A middle class of 250 million (making an equivalent salary of $550 to $1,000 US dollars per month) and rising.

A total population of 1.3 billion, that according to Ernst & Young, spent $6 billion US on luxury goods last year (2006).

And a prediction by investment bank Goldman Sachs that the percentage of China’s populace that purchase luxury goods will rise from 12 percent to 29 percent by 2015. This will place China second only to Japan in global consumption of luxury goods – worth an estimated $80 billion US a year.]

iPhone would first have to resolve technical, content and fee issues unique to China, including Apple’s revenue-sharing agreement that China Mobile would find hard to accept, analysts said.

Apart from China, Apple had also initiated talks with NTT DoCoMo Inc and Softbank Corp to bring its multimedia device to Japan, although sources at both Japanese firms said revenue sharing was again a hotly contested issue.

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iPhone in Asia Editorial Comment: The impending restructuring in the China telecom industry is a prime reason why Apple has not rushed to immediately conclude iPhone negotiations with China Mobile. Apple is very carefully considering how the landscape will be changing in 2008/09 and how this might impact their carrier partnership and iPhone distribution options in China. Post restructuring, there should be legitimate competition for wireless customers. A newly formed China Unicom, with a 3G license and rights to build out the W-CDMA network, can go toe-to-toe with China Mobile and their nascent (unproven) TD-SCDMA 3G network.

The China telecommunications industry restructuring is being done with the direct involvement of the China Ministry of Information & Industry. It has already been decided who is going to run each new business group. Look for announcements following the 2008 Summer Olympic Games in Beijing.

While much has been decided, there will be a few internal restructuring skirmishes.China Mobile will battle the combined Unicom/Netcom for the W-CDMA rights (China Mobile has been saddled with responsibility to make the TD-SCDMA work and they’re anxious to hedge their 3G bet given technical and logistical problems with TD-SCDMA); however, the Ministry of Information & Industry is apparently (if my intel is correct), supporting China Unicom’s bid for the W-CDMA rights. What does this mean? Real, actual, legitimate, serious competition in wireless! Apple is aware of these developments and this is why (IMO) there has been no rush to conclude a deal with China Mobile. Competition means the game is about to change!

Why Apple has a fair chance to win a favorable deal with China Mobile or China carrier or distributor/partner to be named later:

· 287 million of China Mobile’s 356 million subscribers are monthly “pay as you go” vs “on contract with a data-plan.” It should come as no surprise that China Mobile very much wants to grow its “on contract with data-plan” customers … they are far more profitable/important to China Mobile’s future. NOTE: China Mobile has been growing subscribers at a clip of 5 to 7 million per month and the uptake in data services has been impressive (now 25% of China Mobile’s wireless revenue). While these numbers are positives for China Mobile, TD-SCDMA must be able to deliver wide coverage and high speed, or China Mobile stands to lose data-consuming customers to a carrier with the more scalable and reliable W-CDMA.

· The future growth in wireless revenues will come from value added services such as music, messaging, mobile video and mobile TV (CCTV on your phone). To grab this business, you need a reliable 3G (LTE in the future) network, and subscribers who own handsets with excellent audio/visual capability.

· There is no phone that offers audio/visual and boosts data use like the iPhone! Period end of story. Net surfing increases 50 times and overall data-usage doubles or triples!

· To further combat hacking, Apple can work out (with China Unicom’s blessing) a two-tier offering … Specifically, a locked iPhone with a 2-year contract (and presumably some rev share) and a premium-priced unlocked iPhone in the same market. This would follow the iPhone in France via Orange model (French law prohibits handsets from being locked to a network for more than 6 months). Such a move by Apple would preserve revenue sharing model (albeit slight less rev), as 70 to 80% would go with the locked phone, and at the same time deliver a death-blow to the black-market for hacked and jail-broken iPhones.

· Unicom/Netcom would likely offer an attractive “amnesty plan” for China Mobile’s existing iPhone “pay as you go” owners. They will be enticed to go on contract with Unicom with many TBA incentives and knowledge that they can upgrade their iPhones for free … no need to pay a black-market hack-a-phone shop for future Apple or developer upgrades.

· The soon to be unveiled iPhone SDK will come with many cool apps. All Apple and developer community apps will be delivered via iTunes (Apple apps will be free … no cost to iPhone owner, no cost to carrier, no black-market hack necessary).

The rich want to get richer and they (China Mobile) don’t want to lose ground to competitors. China Mobile will likely push MII to win rights to run a dual TD-SCDMA/W-CDMA network. Regardless of whether China Mobile wins that battle, there will be another serious 3G competitor (Unicom/Netcom) in wireless. Given the dynamics in China’s telecom industry and important growth strategies (mobile video watching, on contract data-plan customers) it’s a fair bet that Apple can win a favorable deal in China.